Administered by the United States Citizenship and Immigration Service (USCIS), the EB-5 program (Employment-Based Immigration, Fifth Preference) allows foreign nationals to invest as little as $500,000 or as much as $1 million in a U.S. enterprise, in consideration of potentially receiving permanent residency in the United States. In recent years, EB-5 financing has grown exponentially and has become a highly utilized funding source for hotel development projects.1 Congress created the program in 1990 to stimulate the U.S. economy through foreign direct investment to create jobs. Despite the growth of the program, the EB-5 market is opaque and inefficient, and availability of EB-5 financing may encourage development of speculative (and potentially economically marginal) hotel investments. This report explains the mechanics of conducting an EB-5 transaction, examines the motivations of investors and hotel developers to participate in the program, outlines potential for fraud in EB-5 capital raisings, and demonstrates the potential for bringing marginal projects through an economic simulation of a hotel financed with EB-5 capital.
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